Why Do Most Traders Fail?

It is often said that 95% of retail Forex traders fail and end up losing their entire accounts and while I can not confirm what the actual statistics are I can see no reason to seriously doubt these claims. Whatever the failure rate in retail Forex is I can tell you this, it is the vast majority who fail. If you were to ask a broker how many of their accounts were profitable however you may get a very different answer, they might tell you, for example, that 33% of their traders were profitable. But this wouldn’t mean that 33% of people who tried retail Forex trading were successful; because many more people would have failed and would no longer even have an account as a result and they would not even be counted.

So why are so many people who try their hand at Forex trading so unsuccessful and what could possibly explain such a high failure rate? If you have ever done a Google search on this you will no doubt have come across many reasons which are supposed to explain why Forex trading is so difficult for most people. These reasons will probably have included explanations like not having a proper trading strategy/system, or not having an appropriate risk management system in place, and some even blame the brokers themselves.

But I don’t believe that any of these reasons alone can explain such a horrendous failure rate, even if one were opening and closing trades at random they would have far better results than the vast majority of Forex traders. It is almost like most retail Forex traders can consistently pick exactly the wrong thing to do and pretty much do just that. This leads me to believe that the single biggest reason for most traders failing is purely a psychological one.

Believe it or not, the human brain is wired to trade the Forex market in pretty much exactly the wrong way. Some examples of this might be the fact that leaving a loss to grow and grow in the hope that it will turn around is a very natural thing to do, but it is also a very bad trading strategy. Likewise, grabbing a small profit from a winning trade when you have it rather than risk losing it is also not usually a very good trading strategy either, but again it is a very human thing to do. Doubling up to chase a lose is also a very natural thing for most people to do, and no doubt many novice traders will have lost their trading accounts doing just that.

If you give it some careful consideration, you will realise that the Forex market will generally do whatever it has to do in order to make the majority of traders wrong. A minority of market participants, that is, the big players with the big money, move the market. But in order for the big players to move the market someone has to be on the other side of their trades, the market will therefore do whatever it has to do to dupe the majority of small fish into betting against the whales. And this, I believe, is why we have a market that behaves in a way that human nature finds it almost impossible to beat.

The hardest part of trading is not therefore learning about technical indicators or economics; the real challenge is mastering the beast within and for those who can learn to tame the beast within and succeed at currency trading the rewards can be huge. I like to think of the Foreign Exchange market as rather like a giant poker game where the money flows from the majority of market participants to a minority of tremendously skilled players. As I said, Forex is not an easy market to master, but for those who can the financial rewards can be huge.

Published by David Wallace
David is a full time DBA and Business Systems Analyst and part time currency and indices trader.

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